STEPHEN JOHNSON: Why Reserve Bank governor Michele Bullock’s threats to raise interest rates aren’t believed

Financial markets simply don’t believe Michele Bullock when she threatens the Reserve Bank will raise interest rates to tackle high inflation — making a surprise move more likely on Tuesday.

The 30-day interbank futures market now regards the prospect of a hike on Tuesday afternoon as a zero per cent chance, with the big four banks all seeing the next monetary policy change as a cut rather than a hike.

This is despite both headline and underlying inflation, without volatile price items, both remaining above the Reserve Bank of Australia’s 2-3 per cent target for the 11th straight month in June.

Futures market expectations of an August 11 hike plunged late last month after the consumer price index, or headline inflation on an annual basis, came in at 3.8 per cent.

This was well below the RBA’s May forecast of 4.8 per cent based on fears the Iran war would keep crude oil prices at elevated levels.

EQ Economics managing director Warren Hogan, a former Treasury economist, said the fact financial markets were ruling out another rate hike this month was more a reflection on traders no longer taking Ms Bullock seriously when she threatened to raise rates, rather than them having faith in the RBA.

“The RBA board can keep rates on hold and they can have these forecasts that still show inflation being problematic for the next year or two and they can talk about that policy may need to be adjusted, but if they’re not actually doing it, the market’s just going to dismiss it as they did her speech two weeks ago,” he told The Nightly.

“I think the governor really needs to think long and hard about how to make sure they’re not ignoring her and they’re ignoring her, basically.

“I would argue that response to the inflation number was, ‘She doesn’t have a smoking gun so she’s all talk, we’re going to price this out’ - the market just doesn’t believe it when she says it.”

On July 28 - the day before new inflation data was released - Ms Bullock threatened the Reserve Bank was still prepared to raise the existing 4.35 per cent cash rate.

“The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed,” Ms Bullock said almost a fortnight ago.

After the inflation data was released, the RBA’s chief economist Sarah Hunter was out there the next day suggesting another hike was a possibility.

“What we can do is use our policy lever to bring inflation down. We know that when we do, you know, if we hike the cash rate, for some households that’s really, really challenging. It isn’t for everyone,” she said.

Australia’s major lenders are also no longer expecting rate hikes, as the futures market dismisses RBA threats to hike again.

New data from Canstar shows 31 lenders have cut their variable rates since the start of June, with 60 per cent of mortgage providers offering a product starting with a “five”.

The Reserve Bank last surprised financial markets in July last year when the monetary policy board, in a 6-3 vote, opted to keep interest rates on hold at 3.85 per cent.

It cut the cash rate a month later to 3.6 per cent, only for those three cuts in 2025 to be reversed with rate hikes in February, March and May this year.

Mr Hogan is expecting the Reserve Bank to surprise financial markets again on Tuesday, by raising interest rates to show its aim to bring inflation back to the mid-point of its target isn’t just talk.

“Rather than seeing surprising the market as a negative thing, they should look at the benefits of it,” he said.

This would at least give Treasurer Jim Chalmers the cover to blame someone else for the cost-of-living crisis.

“They can probably do this without getting too much political blowback because I’m sure the Government would love to have a rate hike to blame everything on.”